Clearing Houses

Tuesday, April 7, 2020

ES futures provide one of the most efficient, liquid and cost-effective ways to gain market exposure to the S&P 500 Index. A broad-based, capitalization-weighted index, the S&P 500 tracks 500 of the largest companies of the U.S. economy, and is a key indicator of the stock market’s health. With ES futures, you can take positions on S&P 500 performance electronically.

As a central counterparty, CME Clearing acts as the buyer to every seller and seller to every buyer to ensure the financial security of the marketplace and reduce clearing participants counterparty risk and achieve operational and financial efficiency.  Gain an understanding of how the Clearing market structure is defined, risk management policies and procedures, and the activities of CME Clearing.

 

A clearing house, like CME Clearing, is an intermediary between buyers and sellers in the derivatives market. As the intermediary, or counterparty, to every trade, CME Clearing acts as the buyer for every seller and the seller for every buyer for every trade.

By acting as the counterparty for every trade, CME Clearing helps you mitigate counterparty risk by maintaining a matched book and risk-neutral position. You do not have to worry about the other end of your trade falling through, because CME Clearing is always on the other end.

CME Clearing continually enhances its services and safeguards to best serve the evolving listed (exchange-traded), and over-the-counter (OTC) markets. We provide a set of flexible clearing services that accommodate existing market structures for Interest Rates, Agriculture, Energy, Equity Index, Foreign Exchange (FX), Weather, Real Estate and Metal products, along with OTC instruments, e.g. FX non-deliverable forwards (NDFs) and Interest Rate Swaps (IRS).

 

With a wide range of customers who use our markets, each finds security in CME Clearing as an industry leader. CME Clearing maintains a risk management framework and financial safeguards to provide stability to market participants though changing market conditions.

 

CME Clearing financial safeguards are designed to:

Estimate potential market exposures
Prevent the accumulation of losses
Manage concentration risk among clearing members
Closely monitor the financial integrity and capability of clearing members
Ensure that sufficient resources are available to cover future obligations
Result in the prompt detection of financial and operational weaknesses
Allow for swift and appropriate action to rectify any financial problems and protect market participants


Policies and Safeguards
CME Clearing has evolved its proven risk management policies and financial safeguards to meet the demands of the marketplace, including the growing OTC market, providing a solution that:

  • Complements existing trade execution systems

  • Clears an extensive and expanding product line

  • Offers risk management efficiencies, including portfolio margining

  • Provides risk management tools such as pre-trade credit controls that allow clearing firms to limit the positions taken on by any specific customer

The resulting centrally cleared environment brings many benefits to the marketplace, including transparency of market pricing, market metrics, risk management practices and financial safeguards. Since a central clearing counterparty guarantees the performance of all trades, there is neutrality to every transaction, with uniform risk management standards.

 

Clearing Members
Clearing members provide access to CME Clearing for customers and must be registered as a Futures Commission Merchant (FCM). The FCM guarantees the financial obligations of the customer to CME. Collateral deposited by customers must be segregated from an FCM’s own funds.

 

Performance Bonds
CME Clearing collects performance bonds (initial margin) on a daily basis, collateralizing the risk of potential future losses on positions and performs daily mark-to-market of all open positions to eliminate the accumulation of debt obligations in the market.

 

Performance bonds are good-faith deposits to guaranty performance of open positions against potential future losses. Performance bond requirements provide coverage for a minimum of 99% of market volatility for a given historical period. Requirements are recalculated twice daily for most products, and at least once daily for all products.

Clearing members collect performance bond from their customers and CME Clearing collects performance bond from clearing members. Performance bond requirements vary by product and reflect changes in market volatility.

 

Mark-To-Market
Mark-to-market prevents the accumulation of exposures on positions. Clearing member positions are marked-to-market at each clearing cycle, resulting in the movement of cash for gains and losses on clearing member and customer portfolios.

Mark-to-market must be met with cash; however, performance bond requirements can be met with cash or non-cash collateral. To meet the needs of our clearing members and end-clients, CME Clearing accepts a diverse portfolio of assets as collateral for performance bond deposit.

 

Thanks for reading,

ProTrader Mike

 

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